Whirlpool Corporation 2019 Q1 Form 10-Q Summary
Business context and reporting period
Whirlpool Corporation manufactures and markets major home appliances through four geographic segments: North America, EMEA, Latin America and Asia. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. Whirlpool reported approximately 14.99 million units sold during the quarter, down 2.0% year over year.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $4.760 billion | $4.911 billion | Down 3.1% |
| Gross margin | $812 million; 17.1% | $812 million; 16.5% | Margin up 60 bps |
| Operating profit | $263 million | $143 million | Up $120 million |
| Ongoing EBIT | $298 million | $295 million | Up $3 million |
| Ongoing EBIT margin | 6.3% | Approximately 6.0% | Up 30 bps |
| Net earnings available to Whirlpool | $471 million | $94 million | Up $377 million |
| Diluted EPS | $7.31 | $1.30 | Up $6.01 |
| Cash used in operating activities | $895 million | $713 million | Outflow increased $182 million |
| Free cash flow | $(969) million | $(756) million | Outflow increased $213 million |
Net sales excluding foreign-currency effects increased 1.0%. Lower unit volumes and unfavorable currency effects more than offset favorable product price/mix. Gross margin was stable in dollars but improved as a percentage of sales, reflecting price/mix benefits partly offset by raw-material inflation, tariffs, freight and lower volumes.
First-quarter net earnings included a $127 million Brazil indirect-tax credit recorded in interest and sundry income, a $235 million income-tax valuation-allowance release, and substantially lower restructuring costs. The reported tax benefit was $132 million, compared with $15 million of tax expense in the prior-year quarter. These items materially increased GAAP earnings and EPS relative to ongoing operating performance.
Cash and cash equivalents were $1.163 billion at March 31, 2019, down from $1.498 billion at December 31, 2018. Total cash, cash equivalents and restricted cash were $1.195 billion. Working-capital requirements, including a $475 million increase in inventories and seasonal production timing, drove the operating cash outflow.
Notes payable increased to $2.019 billion from $1.034 billion at year-end. Long-term debt, including current maturities, totaled approximately $4.705 billion. Whirlpool issued $700 million of 4.75% senior notes due 2029, repaid approximately $673 million under the EMEA term loan and repaid $250 million of senior notes. The company had approximately $3.6 billion of committed credit facilities and no borrowings outstanding under those committed facilities at March 31, 2019. Long-term debt maturities due within the next twelve months totaled $568 million.
Material changes versus the prior comparable period
- North America sales increased 0.7% and EBIT margin improved to 12.3% from 11.4%, driven by price/mix despite lower volumes and cost inflation.
- EMEA sales declined 6.0% on currency and price/mix; EBIT margin improved to negative 2.1% from negative 2.5% due primarily to restructuring benefits and volume growth.
- Latin America sales declined 2.5% as currency effects offset volume growth; EBIT margin declined to 5.1% from 6.3%, partly because the prior year benefited from tax-credit monetization.
- Asia sales declined 17.2% and EBIT margin declined to 1.9% from 4.2%, primarily due to lower volumes in China and unfavorable currency effects.
- Restructuring charges fell to $26 million from $144 million. Management expects approximately $100 million of restructuring charges for full-year 2019, primarily in EMEA.
- Cash used in operations and free-cash-flow outflows increased year over year despite higher reported earnings, highlighting the effects of working capital and seasonal timing.
- Right-of-use assets of approximately $858 million and corresponding lease liabilities were recognized upon adoption of the new lease accounting standard on January 1, 2019. The adoption also increased beginning retained earnings by approximately $61 million.
Guidance, outlook, commentary and unusual items
- Full-year 2019 diluted EPS guidance remains $14.05 to $15.05. The guidance excludes the anticipated gain on sale of Embraco and reflects adjustments for restructuring, the Brazil indirect-tax credit, divestiture-related transition costs and related taxes.
- Management expects 2019 operating cash flow of $1.4 billion to $1.5 billion and free cash flow of $800 million to $900 million, including capital expenditures of approximately $625 million and restructuring cash outlays of up to $100 million.
- Industry demand assumptions are approximately negative 2% to flat in North America, negative 1% to positive 1% in EMEA, approximately 5% growth in Latin America and 1% to 2% growth in Asia.
- Whirlpool continued to expect the sale of Embraco to Nidec for approximately $1.08 billion, subject to customary adjustments. European regulatory approval and required divestiture arrangements remained relevant to closing; the closing deadline had been extended by up to six months.
- Key risks include intense competition, weaker global demand, raw-material and tariff inflation, foreign-currency volatility, supply-chain disruption, cybersecurity, product liability and recalls, impairment risk, pension obligations, and litigation and tax matters.
- Material contingencies include unresolved Brazilian tax assessments of approximately $487 million related to BEFIEX credits, approximately $64 million related to IPI matters, and approximately $54 million related to controlled-foreign-corporation taxes. Whirlpool has not accrued these amounts and is contesting the assessments.
- Other significant legal matters include the continuing French Competition Authority investigation, Embraco antitrust matters, an approximately €174.5 million clawback claim related to the insolvency of Alno, product-related class actions, and potential claims relating to the Grenfell Tower fire. The filing states that outcomes and potential losses for several matters cannot presently be estimated clearly.
- The quarterly dividend was subsequently increased from $1.15 to $1.20 per share. Whirlpool repurchased approximately $50 million of stock during the quarter, with approximately $750 million remaining under the authorization.
Most important facts for investors to verify
- Determine how much of the $471 million of quarterly earnings and $7.31 diluted EPS was attributable to the Brazil tax credit, tax valuation-allowance release and other unusual items versus recurring operations.
- Reconcile the significant operating cash outflow and $969 million free-cash-flow deficit with management’s full-year cash-flow guidance.
- Monitor short-term borrowings, the $568 million of debt maturing within twelve months, refinancing activity and compliance with debt covenants.
- Verify the timing, final proceeds and retained liabilities associated with the Embraco sale.
- Assess the effect of tariffs, raw-material inflation, weaker demand and foreign exchange on future margins, particularly in Asia and EMEA.
- Track the resolution and potential financial exposure from Brazilian tax matters, competition investigations, product litigation, warranty issues and other contingencies.
- Review the non-GAAP definitions and reconciliations for ongoing EBIT and free cash flow before comparing Whirlpool’s performance with other companies.